Growing Rider Use Furthers Flexibility, But Also Complexity
One look at the life insurance product development landscape over the last five years leads to one conclusion: There sure are a lot of new supplemental riders and benefits out there.
As we shall see, they have added a lot of design flexibility, but they also contribute to complexity.
The riders and benefits include not only the old standbys like accidental death benefits (on life and annuity contracts), waiver of premium, and guaranteed insurability options, but also a whole new range of provisions with very focused marketing purposes.
Insurers have many reasons for choosing to provide a given feature in the form of a supplemental rider/benefit, as opposed to interweaving the feature as part of the base contract. Common ones include:
Policyholder Choice: Not all policyholders are interested in the same features or place the same value on a feature. So, when the features are offered as optional riders, policyholders can pick and choose the elements that appeal to them. Some policy initiatives, such as those involving unbundled variable annuities, rely fully on the use of riders and benefits to form a menu of choices.
Filing Strategy: Certain policy features receive tough treatment from state regulators. By using a separate rider to convey such features, insurers can avoid having the approval of other base contract features held up by difficulty related to the rider. Long-term care provisions may be an example of such a feature.
Viability of the Feature: The insurer may believe the relevance of a certain feature could be short-lived (e.g., Triple-X-related riders or estate tax-related riders). Or the insurer may have questions about whether the feature is part of its long-term strategy, due to market appeal, profitability or market conduct issues. When a rider is used to provide for such a feature, it can be easily severed from the base contract for new sales or in-force business.
Today, riders and supplemental benefits are in abundance, as noted earlier.
In life insurance contracts, these include extension of maturity date, premium guarantee riders (Triple-X-related), low- or no-commission term riders, accelerated death benefit riders (for LTC confinement and terminal illness), critical illness riders, and for survivorship products, policy split options and first-to-die death benefit riders.
In deferred annuities, they may include: guaranteed living benefits and guaranteed death benefits on VAs, earnings-related death benefits, surrender charge waivers for hospitalization, disability, nursing home, or terminal illness, and persistency or up-front bonus provisions.
Such features do allow for considerable sales and design flexibility, but the financial implication of riders and benefits are less straightforward and sometimes downright complex. (See the checklist for examples.)
Regulatory treatment of riders and benefits by the states and the Securities and Exchange Commission is often less defined compared to the treatment of base policies. For example, soft spots exist in the Life Insurance Illustrations Model Regulation in the areas of riders and benefits. Tax law definitions under Internal Revenue Code Sections 7702 and 7702(A) provide some guidance on certain riders and benefits, but have not kept pace with others.
With some riders and benefits, the structure of the feature can suggest the need to provide a distinct set of nonforfeiture values, but existing regulatory guidance is often thin. Additional uncertainty exists in the areas of reserves and target surplus for many riders and benefits (earnings-based annuity death benefits are an example).
Given this lack of guidance in some areas, an uneven playing field has emerged in which different carriers may be adopting different protocols for the same type of rider or benefit.
In the future, there is no reason to believe that the growing use of supplemental riders and benefits will diminish. The desire for flexibility on the parts of policyholders, agents, and carriers is increasing. This will put greater pressure on regulators and insurers to manage such riders and benefits in an accommodative, but realistic, fashion.
Timothy C. Pfeifer, FSA, MAAA, is a principal at Milliman & Robertson, a Chicago actuarial consulting firm.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.